Trading triangles: symmetrical and ascending triangle patterns

Triangle chart patterns are critical tools in technical analysis, used to predict market trends — whether there will be continuations or reversals. These patterns are identified by converging trendlines that form a triangular shape on a price chart, from which the pattern takes its name.

Technical analysts often combine trading triangles with volume analysis and other indicators to confirm potential breakouts or breakdowns, helping them make more informed trading decisions.

A few factors to note about trading using triangle chart patterns:

• The pattern involves price moving into a tighter and tighter range as time goes by, which gives a visual display that looks like triangles.
• It's generally categorised as a 'continuation pattern', meaning that once the pattern is complete, it is assumed that the price will continue in the direction it was moving.
• A triangle pattern is generally considered valid once there have been at least four touches of support and resistance - a minimum of two on each trendline - though additional touches increase the reliability of the pattern.

While triangle patterns can provide valuable insights, they should not be relied on in isolation. Market conditions can be unpredictable, and chart patterns alone may not capture all the factors influencing price movements.

Symmetrical triangles are formed by a descending upper trendline and an ascending lower trendline that gradually converge.

When the pattern tightens and price approaches the apex, a breakout becomes more likely. A move above the upper trendline can signal the start of an upward trend, while a break below the lower trendline may indicate the beginning of a downward move.

To help confirm the validity of a breakout, traders often look for increased trading volume and multiple closes beyond the trendline. Symmetrical triangle patterns are commonly viewed as continuation patterns, meaning the eventual breakout often follows the direction of the trend that existed before the pattern developed. However, this isn't guaranteed - triangles can and do fail, breaking in the opposite direction, which is why traders must also prepare for reversal scenarios.

Key takeaways

• Symmetrical triangle patterns involve a descending slope of price highs and an ascending slope of price lows converging to a point, creating a symmetrical, triangular shape - unlike ascending or descending triangles, where one trendline is horizontal.
• This shows that neither the buyers nor sellers are pushing the price far enough to make a clear trend.
• As the two trendlines converge, a breakout becomes increasingly likely. Unlike ascending or descending triangles, symmetrical triangles give no structural clue as to direction - the breakout could go either way, but the pattern signals that a decisive move is imminent.

Example: symmetrical triangle breakout

Suppose the ASX 200 CFD forms a symmetrical triangle, with resistance around 8,400 and rising support around 8,300 (index points).

• Entry: consider a long ASX 200 index CFD position if price closes above 8,400 on a volume spike
• Stop-loss: placed just below 8,350 to protect against a false breakout
• Profit target: measured using the widest part of the triangle (around 100 points) and projected from the breakout point, giving an indicative target near 8,500

Note: this is a hypothetical example for illustrative purposes only and does not constitute financial advice. Actual price levels, volumes and outcomes will vary, and trading CFDs is a leveraged activity that carries a significant risk of loss.

An ascending triangle is a bullish continuation pattern formed by two converging trendlines: a horizontal upper trendline, created by a series of nearly identical highs that form a resistance level, and a rising lower trendline, created by a series of higher lows as buyers patiently step up their bids.

As the pattern develops, buyers eventually lose patience and rush in to buy, pushing the price above the resistance level and triggering a breakout on rising volume. This is what confirms the pattern's 'bullish' bias - once broken, the upper trendline, formerly resistance, becomes new support.

Key takeaways

• Buyers continue to put pressure on the resistance level and as a result, a breakout is likely to occur.
• While ascending triangles are typically viewed as bullish, a breakout to the upside isn't guaranteed. If buying pressure isn't strong enough to overcome resistance, price can instead break downward through the rising support trendline - invalidating the bullish setup.
• Traders often place buy-entry orders above the resistance line and stop-loss orders below the rising support trendline.

Example: ascending triangle breakout

Suppose a hypothetical ASX-listed company forms an ascending triangle, with resistance tested several times near A$5.00 and a rising support trendline.

• Entry: consider a long CFD position on a confirmed close above A$5.00 accompanied by rising volume
• Stop-loss: placed below the most recent higher low on the support trendline, for example A$4.80
• Retest: some traders wait for price to pull back to A$5.00 (now acting as support) before entering

Note: figures are hypothetical and for illustrative purposes only. They do not reflect any actual security, price or outcome, and do not constitute financial advice.

To consider a triangle chart pattern valid and reliable, it must show specific structural features that traders use to filter genuine setups from random consolidation:

• At least two points of contact on each trendline: A valid triangle pattern should have a minimum of two touches on both the upper and lower trendlines. Additional touches can strengthen the reliability of the formation.
• A progressively tightening price range: The distance between highs and lows should gradually decrease, showing that price action is becoming more compressed as the pattern develops.
• Adequate development time: Triangle patterns are generally more reliable when they form over an extended period. On daily charts, they often take several weeks to develop, while patterns that complete too quickly may be less significant.
• Declining volume during formation: Trading volume typically decreases as the pattern approaches its apex, reflecting a period of consolidation before a potential breakout.
• No premature trendline breaches: If price breaks above or below a trendline before the anticipated breakout, the triangle is considered invalid, as the pattern's structure has been compromised.

Now that we've explored how to identify triangle chart patterns, let's look at how they can be incorporated into broader trading strategies.

The two main strategies you will be focusing on when using triangle chart patterns are breakout trading and reversal trading. Read on to find out how you can use these strategies to the best of your ability.

Breakout trading strategies

Trading breakouts requires entering a market as the price moves beyond a defined support or resistance level, usually on high volume to avoid 'fakeouts'. When trading triangle patterns, you want to focus on volume confirmation. You also want to make sure that you are measuring the widest part of the triangle and project that distance from the breakout point to set your targets.

Below are some breakout trading strategies you can implement yourself:

• Volume confirmation: Ensure the breakout candle is accompanied by a significant spike in trading volume, indicating strong market participation and conviction.
• The retest and hold: Avoid buying within the market immediately. Wait for the price to break the resistance level, pull back, and successfully hold the old resistance as new support on the retest, before entering a position. If the retest fails, treat the breakout as suspect.
• Candlestick close: Avoid entering a trade based on an intra-candle price spike. Wait for the candle of your chosen timeframe (e.g. daily) to fully close beyond the key level before entering, to confirm the move isn't a fakeout.

Reversal trading strategies

In contrast to breakout strategies, trading reversals means anticipating that a price will bounce off a major support or resistance level rather than breaking through it, often signalling a change in trend direction.

Triangles don't always break in the direction of the trend, and can sometimes act as massive reversal zones or traps. We have listed below some reversal trading strategies that you can try out to make sure you don't fall for these fakeouts:

• Identify the traps: When a triangle stalls and drags out towards the 'apex' (where the trendlines meet), momentum is lost. This is where the pattern may fail, offering a reversal trade opportunity.
• Fade the breakout: If the price breaks out upward but immediately fails to hold the level and falls back inside the pattern, this is often where a short position comes into play (with the reverse applying to downward breaks).
• Break of opposite trendline: If the underlying trend is bullish but the price breaks the lower trendline with high volume, it signals a deeper structural reversal.
• Proper risk management: Reversal trading carries a higher risk of false signals. Confirmation is often sought via the breakout candle closing before a reversal trade is considered.

What are some general tips for these trading strategies?

Some of the general practices for breakout and reversal trading are as follows:

Avoid chasing: If the market runs significantly before you spot the breakout, avoid jumping in late. Wait for a retest to secure a better risk-to-reward ratio.

Be mindful of timeframes: Triangle chart patterns are more reliable on 4-hour or daily charts. Lower timeframes are more susceptible to fakeouts.

Implement strict stop-loss orders: For breakouts, place your stop-loss just beyond the broken level - below the old resistance (now support) for an upward breakout, or above the old support (now resistance) for a downward breakout - to protect against immediate false moves. For reversals, set stops just beyond the extreme high or low of the rejection candle.

Whether a triangle pattern breaks out to the upside or the downside, Trade Nation provides the tools and platform to help you act on the opportunity. With forex CFDs, index CFDs and commodity CFDs available across a wide range of markets, traders can take long or short positions depending on which way the breakout develops.

Ready to get started? Sign up with Trade Nation and take control of your trading. If you'd like to explore the platform first, you can create a free demo account and practise trading triangle breakouts and reversals without risking real capital.

As always, trading involves risk, and no trading strategy - including strategies based on triangle chart patterns - guarantees profits. All examples in this guide are hypothetical and provided for illustrative purposes only; they do not constitute financial advice and do not take into account your personal objectives, financial situation or needs. Before implementing any trading strategy, consider your objectives, experience level and risk tolerance, and seek independent financial advice where appropriate. Please consider the relevant disclosure documents before trading. Trade Nation Australia Pty Ltd (ASIC AFSL 422661).